Warning over record decline in sugar supply

Global sugar production is poised for a record fall this year due to funding constraints caused by the credit crisis and structural problems in the market, Czarnikow, the sugar merchant, warned on Wednesday.

Production is forecast to fall 15.2m tonnes, or 8.9 per cent, to 155.3m tonnes in 2008-09, leading to a supply deficit of 10.4m tonnes.

“What has become apparent is that the scale and complexity of the problems we have seen affecting the supply side of the market have increased during the [current] season,” said Toby Cohen, Czarnikow’s director and head of analysis.

Global cane sugar production is projected to decline 12.3m tonnes, or 6.7 per cent, to 123.3m tonnes while worldwide beet sugar output is forecast to fall 2.8m tonnes (8 per cent) to 32.1m tonnes in 2008-09, compared with the previous season.

“The biggest concern facing the sugar market as a result of the financial crisis is not what happens to the demand side of the market, but the damage to the supply side,” Mr Cohen said.

The financial crisis has had a marked impact on the industry in Brazil, where most of the new investment has taken place, with five milling groups under judicial protection and a large number of mills in discussions with creditors.

Brazil’s sugar output is expected to rise just 170,000 tonnes, or 5.1 per cent, to 33.69m tonnes during 2008-09 as producers continue to favour ethanol production.

Czarnikow said funding issues for Brazil’s sugar industry were “critical” and could add to market volatility as a lack of credit would make it more difficult for producers to hedge price risks.

In India, the world’s largest sugar consumer, output is expected to drop 35 per cent to 18.5m tonnes, due to lower yields and farmers switching to crops such as wheat and rice, which provide better returns.

India could have to import up to 5m tonnes of sugar over the next two years and its switch from net exporter to an importer is a key shift for the global market.

ICE May raw sugar rose 1.3 per cent to 13.30 cents per pound on Wednesday.